Tax Incentives At Risk As Bridge Funding for Fiscal Cliff

Intangible drilling credits and other tax incentives that apply to integrated and supermajor oil companies face the near-term risk of being targeted by U.S. Congress to solve the pending U.S. fiscal cliff, said industry officials at a Deloitte Oil & Gas Conference in Houston Tuesday.

The loss of the tax treatments as a way to bridge the financial gap in the fiscal cliff would likely occur as part of a deal of good faith in the context of broadening the tax base and lowering the corporate tax rate. This would apply not only to drilling credits but to master limited partnerships, said Christine Tezak, managing director of research at ClearView Energy Partners.

The oil and gas industry "should not expect a lot of favors" from the Obama administration, said Barry K. Worthington, executive director of the United States Energy Association, during a panel discussion of energy's potential role in solving the potential financial crisis as well as energy topics to be focused on in a second Obama term.

Any tax credits that are favorable to the oil and gas industry would likely have to be paired with incentives for wind and solar. When it comes to seeking revenue sources to address the U.S. fiscal cliff, the oil and gas industry will likely be viewed as the largest hen in the henhouse and the biggest source for funds, said one panelist.

Whether Obama decides to spend any of his Electoral College earnings on renewable energy, including the renewable tax credit for wind energy set to expire this year, remains to be seen. However, the notion of tax credits for any kind of energy is suspect, said Worthington, who added that he hasn't seen anything that would indicate the United States is any closer to having an energy policy.

Noting that he had never heard so much attention paid to energy in any presidential campaign until this year, Worthington said he would take Obama at his word that he supports an "all-of-the-above" energy policy and see what he does, but questioned whether that would include not only oil and gas but coal and nuclear energy.

Charles Ebinger, senior fellow of the Brookings Institute's energy security initiative, said that he doesn't see President Obama approving the Keystone XL pipeline in the first quarter of 2013, noting that Keystone is the environmental litmus test for the Obama administration. The lack of Keystone approval does not bode well for other pipeline projects that the United States needs built to move shale resources to markets, Ebinger said. However, the other panelists thought the chance of the pipeline being approved were "better than iffy".

Tezak noted that approval of the Keystone pipeline was a better alternative to building the significant, expensive railroad infrastructure that would be needed to bring Bakken crude to market.

Keystone would likely have been approved if Nebraska's governor had not gotten cold feet over the pipeline's siting, giving the Obama administration a chance to side with environmentalists and block the pipeline, added Tezak. .

While environmentalists initially praised natural gas as a bridge fuel to renewables, the shale gas boom made environmentalists realize that natural gas wasn't a bridge fuel to the future, but was the future, said Ebinger, adding that the volume of natural gas available today in the United States was never anticipated.

The U.S. shale gas boom has led to resurgence in manufacturing and petrochemical activity in the United States, and turned the United States into a destination for liquefied natural gas (LNG) imports to a potential LNG exporter.

The question of whether the United States should export liquefied natural gas received a good deal of attention from both presidential candidates in the 2012 election. While a Brookings study found that enough gas exists in the United States to support a manufacturing renaissance and LNG exports, Ebinger worries about what the three-time delay in the Department of Energy's (DOE) study on LNG exports could mean for LNG exports. But what worries Ebinger even more is that Sen. Ron Wyden, who has spoken out against the Jordan Cove LNG project in his home state of Oregon, is likely to become head of the Senate Energy Committee.

"We have millions of people hungry in this country, and you don't see proposals for not exporting food, or not exporting fertilizer because it might hurt U.S. farmers," said Worthington. "When food is exported, farmers grow more produce to meet demand. We're better served by participating in global markets rather than holding back LNG exports to keep gas prices down."

Tezak sees LNG as a political issue with two wrong sides. On one hand, Wyden and Sen. Ed Markey (D-Mass.) have spoken out against LNG exports, saying it's a threat to the U.S. industrial base. However, the Republican platform deviated from its classic free trade agreement stance on LNG, said Tezak, noting that the Romney presidential campaign had expressed sympathy to concerns by petrochemical companies that LNG exports could negatively impact their business. In the end, neither Romney nor Obama pushed the issue as neither wanted to end up on the wrong side.

"I think the release of the DOE study is the beginning, not the end of the discussion," said Tezak, noting that decisions will need to be made on how the permitting process is managed and what companies will be allowed to move forward with projects.

The idea of placing a volumetric limit on LNG exports could create a regulatory nightmare as project backers must first receive project permits, then secure financing to construct the facility, said Ebinger.

Other questions would need answering in how LNG projects are approved, including whether a volumetric ceiling approach would only apply to non-Free Trade Agreement facilities, projects already approved and how much LNG should exported to trade partners. The LNG debate could also turn into a fight between haves and have nots, or established companies versus upstart companies.

Hurricane Sandy revived discussion around climate change after a recent Central Intelligence Agency report linked Sandy to climate change, with some calling for the implementation of a carbon tax. Ebinger expects Environmental Protection Agency (EPA) careerists to bring climate change back on the agenda in a second Obama term.

While not wanting to sound like an alarmist, Ebinger noted that "there's a lot that the EPA can do that would hurt the oil and gas industry."

While questions remain over who might be appointed as the new Secretary of Energy, EPA Administrator Lisa Jackson is likely to stay in her current role, and the administration has yet to rein her in even though they have had ample opportunity. Any restraints on the EPA would come from the courts, not from the Obama administration or Congress.

Ebinger warned that that oil and gas industry needs to speak with one voice on particular issues, instead of discordant voices that include voices overtly antagonistic to the Obama administration.

"You need someone who can speak on the industry's issues in a moderate way," Ebinger commented.

The remaining status quo of power in Congress following the election means that Republicans and Democrats will continue to disagree on many issues. However, one issue they do agree on is energy efficiency, meaning the chances are good for a government-backed energy efficiency program to be passed and that the flat to downward curve of energy usage could become a fact of life, said Tezak.

Karen Boman has more than 10 years of experience covering the upstream oil and gas sector. Email Karen at kboman@rigzone.com

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